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Recommendations on Review of license terms and conditions and capping of number of access providers

and conditions and capping of number of access providers Telecom Regulatory Authority of India Recommendations On

Telecom Regulatory Authority of India

Recommendations

On

Review of license terms and conditions and capping of number of access providers

New Delhi: August 28, 2007

Mahanagar Doorsanchar Bhawan Jawahar Lal Nehru Marg New Delhi-110002

Recommendations on Review of license terms and conditions and capping of number of access providers

Preface

TRAI received a reference from Department of Telecommunications

seeking recommendations on the issue of determining the number of access

providers in each service area and for reviewing the terms and conditions in the

access provider license pertaining to substantial equity holding, transfer of

licenses, mergers and acquisitions, permitting service providers to offer access

services using combination of technology under the same license, roll-out

obligations, etc.

With due diligence, observing the spirit of transparency and carrying out

wide ranging consultations with the stakeholders, the Authority has now finalized

its recommendations which are being forwarded to Department of

Telecommunications. We do hope that the Department would take final decision

promptly on these matters so that the policies of the licensor are in synchronism

with the developments in the telecommunication sector.

It had become essential to seriously consider the issues like “Who should

be the best judge to determine the spectrum prices?” and “What is the most

transparent mode of spectrum allocation?” The Authority while making

recommendation has made attempts to introduce market forces to maximum in

the decision making. It is obvious that lot of development have already taken

place in this sector and the Authority while respecting legacy and level playing

field has to fall back on a modular building approach. The Authority has

approached the issues to enable open market functioning and a transparent

predictable process where decision necessarily has to flow from the licensor. It

has attempted to make it easy for potential rivals to get into the market. As a

Regulator we are concerned with maximizing the welfare of the consumers,

healthy growth of telecom and financial viability of the telecom companies. It is

our belief that these objectives have been largely addressed in these

recommendations.

(Nripendra Misra) Chairman, TRAI

Recommendations on Review of license terms and conditions and capping of number of access providers

Table of Contents

Chapter 1 Introduction

4

Chapter 2 Entry Limit in Access service provision

12

Chapter 3 Intra-circle Merger, Acquisition and Transfer

59

Chapter 4 Access services using combination of technologies under the same license104

Chapter 5 Roll out obligations

121

Chapter 6 Summary of recommendations

137

Annexure I. DoT’s letter dated 13th April 2007 seeking TRAI’s recommendations

145

Annex II DoT’s Guidelines for merger of licences in a service area

147

Annex III Number of wireless service provider in each service area along with their market --

------------share

151

Annex IV WPC spectrum allocation criteria

157

Annex V Comparison of WPC’s criteria subscriber threshold with the actual subscriber base

 

158

Annex VI List of cities with over a million population

165

Annex VII Subscriber number possible to serve with spectrum amounts

166

Annexure VIII: Some of the Countries where Spectrum is managed by Regulator

168

Annex IX Market share of operators

169

Annex X Circle-wise analysis of Concentration Ratios of Wireless Market shares

173

Annex XI International practice on roll out obligations for 2G/3G licenses

174

Recommendations on Review of license terms and conditions and capping of number of access providers

Chapter 1 Introduction

1.1 The telecom industry in India has seen phenomenal growth in the recent past. Annual growth in the past fiscal year has almost outpaced total combined growth from the beginning of telephony in India through to March 2004 and the industry has already met the 2010 goal of a teledensity of 15 percent set in the New Telecom Policy 1999, and is poised to surpass the DoT’s target of 250 million telephone subscribers by 2007. A major factor in this success has been the liberalization of the Indian telecom market accompanied by an effective policy and regulatory framework.

1.2 However, competition and subscriber growth by itself may not be sufficient to ensure that the Indian telecom sector will sustain the same phenomenal growth in the changing market scenario. In the last few years the telecom Sector has also witnessed a major transformation, with the entry of a large number of operators, higher wireless growth, addition of innovative value added services, inclination of operators to deploy state of art technologies, introduction of bandwidth hungry applications and the requirement of additional spectrum for such services, increase in FDI limit, etc.

1.3 The telecom access market in future will be served by a combination of technologies due to convergence of technology/market in ICT sector. The purpose of regulation is to facilitate and intensify competition when it is not occurring efficiently or fairly in the market. In a developing economy, the regulator has not only to address the social good or consumer interest but also has to provide a catalytic role in development.

Recommendations on Review of license terms and conditions and capping of number of access providers

1.4 It is imperative that policy framework is periodically reviewed to provide the required impetus for sustained growth. For further growth there is an urgent need to ensure a clear, fair, predictable, transparent and stable policy & regulatory framework, especially with regard to spectrum policy, investment norms, competition policy, and the licensing regime. A robust competitive environment wherein service providers and technologies compete to deliver wide variety of telecom services to the end user is vital for sustained growth.

1.5 Recognizing the need to ensure that the policies keep pace with the developments in the Telecommunication sector, the Government has sought recommendations of TRAI, as per the provisions of TRAI Act. The reference from Department of Telecommunications (letter No. 16-3/2004- BS-II dated 13 th April 2007 (see Annex I)) seeking recommendations is on the issue of determining the number of Access providers in each service area and review of the terms and conditions in the Access provider license which include the following:

Substantial equity holding by a company/legal person in more than one Licensee Company in the same service area (clause 1.4 of UASL agreement). Transfer of licences (clause 6 of the UASL). Guidelines dated 21.02.2004 on Mergers and Acquisitions. TRAI in its recommendations dated 30.01.2004 had opined that the guidelines may be reviewed after one year. Permit service providers to offer access services using combination of technologies (CDMA, GSM and/or any other) under the same license. Roll-out obligations (Clause 34 of UASL). Requirement to publish printed telephone directory.(TRAI has already sent its recommendations on 5 th May 2005)

Recommendations on Review of license terms and conditions and capping of number of access providers

Certain issues are applicable to other licenses (National long distance (NLD)/International long distance (ILD) etc.) also.

1.6 In the said letter, DoT has also requested TRAI to furnish their recommendations in terms of Clause 11(1)(a) of TRAI Act, 1997 as amended by TRAI (Amendment) Act, 2000 on the issue of limiting the number of Access provider in each service area.

1.7 TRAI issued a consultation paper in this regard on June 12, 2007. The main issues raised in the consultation paper are given below:

Determining a cap on number of Access providers in each service area – Since 2003/2004 open competition has been introduced in the access service sector. As a result we have 6-9 mobile/Unified Access service providers in each service area and some more companies have applied for new licenses. Spectrum – a scarce resource is vital for provisioning of mobile services. As noted earlier most of the spectrum useful for mobile services is used by incumbent users and vacation/refarming efforts has not given the desired results, as of now. It is also pertinent to note that in the past as a result of introduction of more and more players and healthy competition the country has witnessed tremendous growth, lower tariffs, availability of wide variety of services, etc. The main issue that needs consideration relates to determining the optimum number of players to be permitted to operate in a particular service area or leave it for market forces. Merger and Acquisition – In the existing licensing regime, mergers and acquisitions are permitted subject to certain conditions viz. presence of minimum 3 operators and consequent upon merger, market share of less than 67% of the merged entity. The guidelines (enclosed at Annex II) also specify the limit of spectrum that a merged entity can retain consequent upon merger. While deciding the issues related to mergers and

Recommendations on Review of license terms and conditions and capping of number of access providers

acquisitions, main issues relate to defining markets, criteria for determining dominance/market power, maximum spectrum holding for a merged entity, cross technology mergers, minimum number of access providers in a service area as a result of mergers and acquisitions have been considered. Substantial equity – In the existing licensing regime, no single company/ legal person can, directly or indirectly have substantial equity holding i.e. equity of 10% or more in more than one licensee in the same service area for the Access services. In order to prevent anti competitive ownership patterns and ensure effective competition in the market it is imperative to restrict ownership level of a company in different companies of the same service area. At the same time it is required to be ensured that policy environment facilitate investment and healthy consolidation. The main issues that need consideration pertain to the need and scale of existing substantial equity clause. Permitting combination of technology under same license – Today the licensing regime does not explicitly permit a licensee to offer access services using combination of technologies (CDMA, GSM and/or any other) under the same license. The licensee have been allocated spectrum either in 900/1800 MHz bands for GSM technology or in 800 MHz band for CDMA technology. In addition spectrum has also been allocated to some access service providers in 1880-1900 MHz band for micro cellular architecture based system. The spectrum band relevant to mobile services is also being used by Defence and other users, as a result demand outstrips supply. The main issue relates to desirability and modality of permitting a licensee to offer access services using combination of technologies (CDMA, GSM. etc) under the same license. Roll out obligations – At present the telecom sector is one of the fastest growing sectors. During the last decade, it has witnessed a change from a state owned monopoly to oligopoly with unprecedented growth in the number of users. The overall teledensity today is around 20% and there is

Recommendations on Review of license terms and conditions and capping of number of access providers

enough scope for further growth. There are millions of ears of Indians which are still waiting to hear the ring tone. To make it possible, the immediate need is to accelerate the pace of penetration of telecom networks especially in rural and remote areas of the country. The issues that need consideration relates to desirability, form and scale of roll out obligations to be imposed on access service providers especially keeping in mind the present teledensity figures and the widening gap between the urban and rural teledensity.

1.8 Written comments received in the consultation process were posted on TRAI’s website. Open House Discussions were also held in this regard, in New Delhi on 18 th July 2007. Based on the comments received in the consultation process, study of international best practices, and changed market scenario both in India and the world over, and also the technological advancements that have happened in the recent past, TRAI has framed these recommendations. The basic guiding principle has been that the Regulatory environment must take into consideration the changing requirements of dynamic telecom sector, and must hold the final benefit to the consumer as the ultimate guiding factor in deciding any policy. There have been so many changes in the Telecom environment that certain ideas and concepts perhaps require rethinking, or may even be required to be changed in order to be in line with the developments that have taken place. As a Regulator, keeping in mind the larger interest of the Sector and the telecom penetration targets, the TRAI has taken a broader view on each issue, in an attempt to keep pace with the fast changing environment and to facilitate the consumers to derive maximum benefit from the technological advancements that are perpetually being brought about through research and innovation.

1.9 As the Indian market matures, the requirements and aspirations of the subscribers are also changing. The subscriber, who was initially satisfied

Recommendations on Review of license terms and conditions and capping of number of access providers

with simple mobility or plain vanilla services, now requires that all his communications needs be met while on the move. In this scenario, every Service Provider would like to create a brand for himself by introducing new and more advanced services at the most affordable and competitive rates possible.

1.10 While acknowledging the aspirations of both the subscriber as well as the Service Provider, the Authority has to also take into account the legacy of the policy and regulatory environment which has existed and been in operation to date. While framing these recommendations the Authority has endeavored to maintain the sensitive balance between the conflicting demands with the main aim of maximizing consumer interest and facilitating growth in the sector.

Fostering future growth

1.11 Going forward, the newer technologies coming into the market are moving more and more towards convergence and the lines between different services and different categories of services are fading. Whether it is the 3G Services, NGN, BWA etc, in all these cases the road ahead is towards a converged situation. The growth in Wire line services is minimal and the exponential growth seen in the Telecom sector, today, is largely in the Wireless segment, and this trend is likely to continue. Keeping in mind the nature of, and the future developments in the Telecom Sector and the need for quick deployment of new technologies, the Authority has taken a broad and progressive view on the issues referred to TRAI.

1.12 This review of sectoral policy particularly licensing is an important milestone which will significantly contribute to the future of telecom services in India. While deciding the issues mentioned in ¶ 1.5 it is important that we recognize that it is the right time to provide the required fillip to our telecom industry that will go a long way to facilitate India’s

Recommendations on Review of license terms and conditions and capping of number of access providers

vision of becoming an IT superpower and develop a world class telecom infrastructure in the country, as envisaged in our New Telecom Policy

1999. In many respects TRAI’s recommendations are poised to achieve

next generation reforms in Telecom sector.

1.13 Wireless technology is the future growth driver. Spectrum is the single most important input. Unfortunately the spectrum management policy has not kept pace with the dynamism of this sector. Even today it is tied to legacy and traditional approach of spectrum management. It is not predictable. The policy does not address in comprehensive manner the challenges of future growth where a radical change in technologies is emerging. The future growth of wireless services will receive a set back unless spectrum issues are addressed on emergency basis. India is already behind in the development of 3G technology. Option of Broadband Wireless Access is not readily available either to the manufacturer or to the telecom service provider because of the uncertainty both in terms of spectrum band policy, allocation and pricing. Perhaps the Government could consider relocation of spectrum related work on lines of global practices.

1.14 In an environment, where technology changes outdistance the ability of regulators to modify current rules and adopt new ones to take advantage of the technology advances, decision taken to manage and license spectrum solely on a specific technology or technologies are inefficient, distort the market place, and inhibit competition. The service providers should be encouraged to deploy new technologies that offer higher data rates, provide better quality of service and more diverse applications, particularly when adoption of the new technologies result in less spectrum being needed to provide the service.

Recommendations on Review of license terms and conditions and capping of number of access providers

1.15 The new advanced technologies and converged services that use spectrum are demanding more flexibility and service/technology neutral frameworks. The task of spectrum management in a multi user and multi usage scenario is more daunting and crucial than ever before. As new spectrum technologies unfold and proliferate, spectrum management will have to adapt and dynamically evolve in a responsible, fair, transparent, predictable and technology neutral manner.

1.16 While framing these recommendations, the Authority has kept in mind all the above mentioned issues and objectives of facilitating growth in telecom sector, maximization of consumer interest, ensuring efficient utilization of scarce resources, ensuring availability of adequate spectrum, promoting efficiency in operations, maintaining level playing field and facilitating technological developments.

1.17 Thus it has addressed in these recommendations removal of barrier to entry or exits and creation of newer opportunities for substitute deliverables. The regulator and policy makers today have to offer a transparent set of performance platform and leave rest to telecom operators. Instead of end to end networks role the telecom sector will have multiple performers including content providers and end users. The Regulator, the policy maker and the telecom companies will have to come out from the ‘prevent mode’ to viable alternatives. The message conveyed through Chapter-2 to Chapter-5 is a ‘light handed’ regulatory paradigm.

Recommendations on Review of license terms and conditions and capping of number of access providers

Chapter 2 Entry Limit in Access service provision

2.1 Since the liberalization of India’s telecommunications sector starting in 1992, the number of service providers has consistently increased over time. As of July, 2007, there are over 180 licensed cellular and unified access service providers in the country. The increase in the number of service providers has brought with it specific benefits. In the mid- 1990s, there were generally two cellular service providers in each circle. Through the introduction of the third and fourth operator, tariffs for cellular service have fallen over 90 per cent, and today it matches the fixed-line tariffs. Additionally, the subscriber base and coverage have increased dramatically due to increased competition and the effort by service providers to capture the largest market share.

by service providers to capture the largest market share. Figure1: The market has benefited from competition

Figure1: The market has benefited from competition

2.2 The whole of the country has been divided into 23 telecom service areas and today, there are six to nine access service providers in each service area. The number of service providers in each service area along with their market share as on quarter ending June 2007 is provided in Annex III. From this table it is observed that the market share of existing service providers in various service areas range from 10% to 35% except few exceptions. The overall wireless market share of various operators is shown in figure 2.

Recommendations on Review of license terms and conditions and capping of number of access providers

Others

8% Bharti Idea 23% 9% Tata 9% Reliance Hutch 17% 17%
8%
Bharti
Idea
23%
9%
Tata
9%
Reliance
Hutch
17%
17%

BSNL

17%

Figure 2: Wireless market share of various operators. 2.3 Though 6-7 million subscribers are being added on an average to the network per month, for the past mobile penetration of our country is very low as compared to many countries (see figure 3).

Country W ise M obile Penetration

160.0% 138.0% 140.0% 116.8% 120.0% 108.4% 101.7% 94.9% 100.0% 79.1% 74.9% 73.7% 80.0% 64.5% 53.7%
160.0%
138.0%
140.0%
116.8%
120.0%
108.4% 101.7%
94.9%
100.0%
79.1%
74.9%
73.7%
80.0%
64.5%
53.7%
60.0%
47.5%
35.0%
40.0%
30.7%
16.3%
20.0%
0.0%
Figure 3: Mobile penetration in selected countries 1 .
Italy
UK
Hong Kong
Taiwan
Belgium
France
Argentina
Malayasia
Thailand
Brazil
Philippines
China
Pakistan
India*

1 Source: Merrill lynch global Matrix 4Q 06 and TRAI. * Data for India is as on June 2007.

13

Recommendations on Review of license terms and conditions and capping of number of access providers

2.4 As on March 2007, the urban teledensity is around 48% and rural teledensity is only around 6% 2 . Last decade has witnessed a widening gap between the urban and rural areas.

2.5 The present licensing policy allows any Indian company fulfilling the eligibility criteria to apply for the UAS license. However, DoT vide its letter dated 13 th April 2007 has sought TRAI’s recommendation in terms of clause 11 (1) (a) of TRAI Act 1997 on the issue of limiting the number of Access providers in each service area. The main reason mentioned in the letter is as follows:

“The policy on Unified Access Service Licensing was finalized in November 2003 based on the recommendations of TRAI. As on date, 159 licenses have been issued for providing Access Services (CMTS/UASL/Basic) in the country. Generally, there are 5-8 Access Service Providers in each service area. The Access Service Providers are mostly providing services using the wireless technology (CDMA/GSM). As per the present policy, any Indian company fulfilling the eligibility criteria can apply for UAS license. These are increasing the demand on spectrum in a substantial manner. The government is contemplating to review its policy. A suggested option can be to put a limit on the number of Access Service Providers in each service area, in view of the fact that spectrum is a scarce resource and to ensure that the adequate quantity of spectrum is available to the licensees to enable them to expand their services and maintain the Quality of Service.”

2.6 The suggestion contained in the reference received from the Government to put a limit on the number of access service providers in the service areas on account of spectrum shortage had been raised in

2 Rural teledensity takes into consideration Rural DELS and rural mobile connections. Rural population is taken as 70% of total population as on 31 st march 2007 (1129.87 million).

Recommendations on Review of license terms and conditions and capping of number of access providers

the consultation paper and the views of the stakeholders on this issue among other things have also been received and published on the website of TRAI. These are discussed in the paragraphs that follow.

2.7 Response to this issue from the stakeholders is on the expected lines. That is significant number of incumbent wireless operators do not favour a free entry and the likely entrants in the wireless space including those who are on the waiting list for licenses are against putting a cap on the number of access service providers.

2.8 The central issue underlying these comments however pertains to the availability of spectrum, its allocation criteria, pricing methodology and method of evaluating utilization of the spectrum as to its technical and economic efficiency. Continued uncertainty as to the total availability of spectrum has generated apprehensions and anxieties leading the stakeholders to take firm positions resulting in polarization of viewpoints in the matter.

2.9 Supporting the idea of limiting the number of access service providers, some stakeholders primarily representing incumbent wireless operators have strongly argued that Indian access market is already intensely competitive and entry of any further operators may harm the competitive equilibrium and will have a negative impact on the quality of service. It is further argued on their behalf that low tele-density of 20% does not necessarily mean that scope exits for introduction of new players. One major line of argument of the incumbent wireless operators is that once a service provider has been granted a cellular license, that licensee must be assured of adequate spectrum. The present policy of open competition is not sustainable and must therefore be reviewed to consider capping number of service providers because even some of the new licensees who have been granted licenses have not yet been allotted their initial spectrum entitlement. Further, the Government has laid down a roadmap of at least 2x15 MHz for each GSM operator and even that is well below the

Recommendations on Review of license terms and conditions and capping of number of access providers

international best practices. One other argument that has been put forth by an existing major operator is that the spectrum efficiency is maximized by unifying spectrum allocations and sub-dividing spectrum among licensees would only diminish overall spectral efficiency and the consequence of spectral inefficiency is higher cost for all licensees.

2.10 Proponents of free entry into market argue that service providers as corporate entities are expected to go through due diligence process before entering into any business and thus they would have weighed the pros and cons of waiting in queue to begin their operations in any given service area as wireless service provider. Further, it is argued that considering the requirement to cover uncovered areas in the country and in view of the low tele-density in the context of booming economy, there is still space for more number of players in the market. In fact, it is argued that intense competition witnessed in the wireless market has not adversely impacted any service provider and on the contrary the financials of wireless service providers have improved substantially and they continue to look very bright. Strong argument in favour of persisting with the existing licensing policy of free entry is that in recent times, innovations/technical progress have enabled greater spectrum efficiency, creating space for additional operators in the market. Evidence also has been cited to support this argument by saying that the Quality of Service (QoS) benchmarks have been met by the wireless operators despite exponential growth of subscribers. It is argued that limiting the number of licensees through regulatory regime changes, could result in inefficient use of the spectrum by incumbent wireless operators, because such a policy change will discourage innovation. In this context, some stakeholders argue that incumbents who have taken the lion’s share of spectrum evaluate the options of deploying capex for adopting innovative technology solutions to improve spectrum efficiency with that of the potential cost of acquiring additional spectrum and in the ultimate analysis it is seen by them to be more profitable to ask for more spectrum even at the cost of payment of higher annual spectrum charges. Therefore, the present licensing

Recommendations on Review of license terms and conditions and capping of number of access providers

policy does not encourage efficient utilization of spectrum which is a finite resource and which is demanded and used by multiple agencies. Stakeholders who support free market principle have also suggested that in the interest of level playing field between existing operators and the new entrants, and in the context of overall shortage of spectrum availability, that a cap be placed on further allocation of spectrum above 10 MHz.

2.11 The Authority has examined the conflicting viewpoints on this vital issue and tested the suggestions arising out of the consultation process in the light of the following:-

1)

New Telecom Policy i.e. NTP, 1999

2)

Growth objectives

3)

Sector experience till date including financials of existing

4)

operators Principles of fair competition and other vital economic criteria

5)

Upcoming technological developments

NTP 1999

2.12

On the issue of mobile access license policy, NTP, 1999 states as

under:

 

“CMSP would be granted separate license for each service area. Licenses would be awarded for an initial period of 20 years and would be extendable by additional period of 10 years thereafter… Availability of adequate frequency spectrum is essential not only for providing optimal bandwidth for every operator but also for entry of

additional operators…

It is proposed to review the spectrum

utilization from time to time keeping in view the emerging scenario of spectrum availability, optimal use of spectrum, requirements of market, competition and other interests of public.”

2.13

It is evident from the policy that there is no intention of placing any artificial cap on the number of access service providers. Clearly, the underlying theme is to ensure optimality for existing operators so as to

Recommendations on Review of license terms and conditions and capping of number of access providers

provide good quality service but at the same time it has not barred entry of new operators.

Sector experience in India

2.14 Sector experience in India particularly in the wireless market suggests that the explosive growth of wireless market being witnessed during the last few years in India, has been made possible by the open competition policy that permits free entry. Growth continues to remain the top priority of the Government. Further, current indications clearly suggest tremendous opportunity/potential for further growth. Also further growth requires huge amount of capital investment not only for strengthening the existing areas but also for penetrating into newer areas hitherto uncovered. Huge capital investment for achieving higher tele density and the target of 500 million subscribers by 2010 and for penetrating into rural areas has to be augmented by the industry at a faster pace than before. Relying upon few operators for raising these capital resources for further growth may not be an appropriate option as it would be a time consuming process for the existing operators to fill the gap in funding requirements for capital investment. No doubt, the market has out performed all expectation and today Indian wireless market is said to be one of the fastest growing wireless markets in the world clocking 67% CAGR during the last four years. The market continues to grow with an incremental subscriber base of 6-7 million per month and with sound financials of the existing major operators crossing 40% EBITDA. Statements made by one industry association on stagnant EBITDA margins and poor financials are not supported by evidence. Current market performance and the projected growth scenario do not justify the claim for limiting the entry.

2.15 An argument has been made by one of the stakeholder in response to the consultation paper that the capex to sales ratio is one of the highest for Indian service providers (as high as 70-80% in some cases) and thus implying thereby that the high amount of funds are required for expansion of service by them. The Authority examined this statement

Recommendations on Review of license terms and conditions and capping of number of access providers

with the available evidence across the emerging markets in the Asian region. In general, capex requirement is likely to be high during the initial growth phase and this trend has been seen in the past in many markets and it is seen even now in some of the emerging markets like Indonesia where the capex to sales ratio estimated for the year 2007 ranges from 56% for Indosat to 147% for Bakrie Telecom. 3 Requirement of the high capex deployment is also to be viewed in the context of growth scenario in the country. The Asia Pacific average of 44% of capex to sales ratio as cited in COAI’s submissions is only an average and there are number of countries where growth has already happened as evidenced from the wireless penetration rates and the current growth rates of these countries are given below:-

Asia Wireless Growth Rankings 2007

 

Wireless Sub Growth

Wireless Penetration

India

54%

20%

Bangladesh

53%

22%

Pakistan

52%

44%

Vietnam

36%

27%

Sri Lanka

35%

34%

Indonesia

34%

37%

Cambodia

33%

15%

China

16%

40%

Philippines

15%

55%

Malaysia

11%

86%

Thailand

10%

60%

Korea

6%

86%

Singapore

6%

110%

Hong Kong

3%

118%

Taiwan

1%

96%

Note: All data is based on December 2007 forecasts 4

2.16 Evidently, capex requirement is inversely related to the existing penetration levels and the future potential for growth. It is clear from the above that Indian market is in the high growth phase and therefore

3 Valuation matrix of emerging countries, Bloomberg, JP Morgan estimates

4 Source: JP Morgan estimates

Recommendations on Review of license terms and conditions and capping of number of access providers

the capex requirement for Indian market will be much higher during this phase as compared to many other markets in the Asia Pacific region where saturation levels has almost been reached. It is on account of this factor, some stakeholders have suggested not to consider the option of limiting the operators in access service provision.

Principles of fair competition and other economic criteria

2.17 From the perspective of competition in the market, it is important to ensure that existence of potential competition ensures that competition is sustained. The existence of potential competition is negated when barriers to entry are erected by way of policy. Threat of entry is an important stimulant for competition in the market. European Commission Guidelines on Market Analysis (2002) has underlined the importance of potential competition which is reproduced below:-

“In electronic communications markets, competitive constraints may come from innovative threats from potential competitors that are not currently in the market. In such markets, the competitive assessment should be based on a prospective forward looking approach.”

2.18 Threat of potential entry may prevent incumbent firms from raising prices above competitive levels. However, if there are significant barriers to entry this threat may be weak or absent. Incumbent operators in such situations are then likely to raise prices and make persistent excess profits without attracting additional competition. Absolute barriers are said to exist where enterprises have access to or are granted privileged use of resources which are not similarly accessible to potential entrants. 5

2.19 It is clear from the above that ensuring a potential competition in the

Needless to say, competitive

market would mean no barrier to entry.

5 Oftel’s market review guidelines : criteria for assessment of market power, 2002 (www.ofcom.org.uk).

Recommendations on Review of license terms and conditions and capping of number of access providers

market provides the greatest benefits to consumers. Low or nil barriers to entry facilitate a high degree of innovation.

2.20 A recent study by BDA/Confederation of Indian Industry on wireless market in India has concluded that the Indian market has always benefited when the number of service providers has increased and competition has become stronger. 6

2.21 On the entry based approach to the design of competition policy for developing countries, Ross C. Singleton (1997) 7 has stated the

following:-

“Freedom of entry is the sine qua non of the competitive process. Freedom of entry promotes the development of efficient, innovative firms capable of competing in international markets and ensures that market reforms will enhance social welfare.”

2.22 In a paper on Competitive Access to Telecom : Spectrum Policy and M&As, Arvind Virmani (2004) 8 argues that modern analysis of monopoly and competition focuses on two aspects which are relevant

for today’s telecom sector and these are contestability and abuse of market power. In this context, he has described contestability as

follows:-

“The threat of entry has been found to be as important an instrument of competition as actual entry. A lot more attention therefore needs to be paid to this factor than is common. In particular, in the telecom context it is essential to ensure that there is free spectrum available for new entrants when the number of providers goes below some threshold.”

2.23 Harald Gruber in a paper on spectrum limits and competition in mobile markets has examined the impact of scarcity of frequency spectrum on

6 Wireless India, a joint study between BDA and the Confederation of Indian Industry, June 2007

7 Ross C. Singleton (1997), Competition Policy for Developing Countries: A long-run entry based approach, Contemporary Economic Policy 15(2), 1-11, April, 1997

8 Economic and Political Weekly, Vol.XXXIX No.7, February 14-20, 2004

Recommendations on Review of license terms and conditions and capping of number of access providers

the performance of mobile telecommunications industry. A key observation by the author which has relevance to the subject matter under discussion is reproduced below:-

“As technological progress creates the conditions to support a large number of firms in the market, competition in the market increases and market growth for mobile telecommunications accelerates as well.” 9

2.24 The Author has supported the viewpoint that technological progress relaxes the constraint of scarcity of radio spectrum somewhat and to that extent it leads to enhancement in the efficiency of spectrum usage and thus increased service capacity.

2.25 One industry association in its written submission has argued that “to state that consumer interest are served by higher competition is not correct” and to support this statement, the association has explained this point by saying that a fragmented market deprives players from reaping the benefits of economies of scale which otherwise could have been passed on to the subscribers.

2.26 The Authority examined the import of this statement made by the industry association in the light of experience of various liberalized telecom market including India. It may be recalled that at the time of liberalization of telecom markets, the then incumbent operators had argued exactly the same way and made attempts to stall the process of reforms in telecommunication sector by stating that economies of scale would be compromised. Growth of telecommunication services during the period after liberalization world over proved that such apprehensions of the incumbents were misplaced. Further, it has been proved time and again in many liberalized markets for telecom services including India that competition in the market has facilitated high levels of growth. Empirical evidence suggests that even the benefits of scale

9 Gruber H, Spectrum limits and competition in mobile markets: the role of license fees, Telecommunications Policy 25 (2001) 59-70

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effect are largely cornered by the dominant incumbents in the wireless market. This is evident from the results of analysis contained in a research report 10 on the Asian telecom markets released recently which is reproduced below:-

“Dominant incumbents could largely benefit from scale effect in terms of network coverage, distribution channels, brand name and bargaining power across the value chain. This could lead to tremendous entry barriers to new comers and we believe the gap between the leading players and the smaller one is actually wider than expected in large, growing markets such as India and China.”

2.27 Implications of this research finding are twofold : one, scale economies for major operators in India are huge and it benefits only them and two, such scale effect could lead to tremendous entry barriers to the late entrants leading to disadvantages to the latter. The Authority is therefore not convinced of the argument that there is trade off between the benefits of “economies of scale and greater competition”. Empirical evidence suggests that interests of consumers are best served by the forces of market and thus the Authority is convinced that to sustain competition in the market in the long run, it is necessary to ensure that barriers to entry into the market are reduced/removed.

2.28 Eun-A Park and Richard Taylor (2006) 11 have examined the question of barriers to entry comparing the US and South Korean markets for broadband services. In their review of literature regarding determinants of market entry, one important citation indicates that the entry decision is driven by two critical factors: one, the post entry profitability and two entry costs. Firms decide to enter a market only if it is profitable to do so. Factors that determine the post entry profit of new firm as identified in the study include market size, intensity of price

10 Asian Telecom Themes and Strategy, page no.3, UBS Investment Research, 15.5.2007. 11 Eun-A Park and Richard Taylor, Barriers to Entry Analysis of Broadband Multiple Platforms: Comparing the US and South Korea, Telecom Policy Research Conference, September-October,2006, Washington DC.

Recommendations on Review of license terms and conditions and capping of number of access providers

competition, level of product differentiation and existence of rival networks. Thus, the factors that influence the post entry profit therefore determine new entry. The Authority believes that when such market forces are said to be the determinants of entry decision of a firm in the access market, placing artificial entry restriction in the form of a licensing policy may not be appropriate at this stage.

Upcoming Technological Developments

2.29 The Authority examined the conflicting viewpoints of the stakeholders on the issue of limiting the entry of players in the access services provision, in the light of current technological developments and those that are on the horizon.

2.30 The range of arguments and viewpoints put across by some stakeholders to justify limiting the number of access service providers reveal there is in fact only one reason which prompts them to demand erection of an entry barrier which is the spectrum availability/allocation.

2.31 The Authority notes that the business model of either the existing operators or the potential entrants is not normally decided either by the Government or by the regulator and it is appropriate that such barriers are not put in place in a growing market. Policy should therefore not deny entry particularly in a market where the firms are exposed to constant technological changes that has implications for spectrum efficiency. Harold Gruber 12 an authority on this issue has concluded

that ‘waves of generations of technology have typically been a trigger for additional entry, as newer generations of technology with more efficient use of radio spectrum permitted the entry of more firms’.

2.32 Further, the Authority noted the provisions in the existing license agreement wherein it is seen that the license is for access services. A major implication of placing a cap on the number of access providers is

12 Harald Gruber, The Economics of Mobile Telecommunications, Cambridge University Press

Recommendations on Review of license terms and conditions and capping of number of access providers

that, such a policy would mean even if an access service which does not require the spectrum or a service which requires spectrum of a band whose availability is not in short supply will also be not available to the society. Unified licensing regime was recommended by the Authority in January 2005 with the key objective of encouraging free growth of new applications and services leveraging on the technological developments in the information and communication technology sector. Therefore, limiting the number of players in the access service market in India would be construed as a retrograde step.

2.33 The Authority also recalls its recommendations on allocation and pricing of spectrum for 3G broadband wireless access services wherein it had recommended allocation of spectrum for 3G services be made available only to the existing operators. In the same recommendation, the Authority expressed its viewpoint on the supply demand position of the spectrum which is relevant in the current context. Excerpts from the said recommendation are reproduced below:-

“In view of the scare availability of spectrum and the increasing demand by wireless technologies, the Authority feels that now there is an urgent requirement to have a fresh and comprehensive look at the present practices of spectrum allocation and pricing as well as ensuring its efficient usage.”

2.34 Evidence available with the Authority and cited by many stakeholders suggests that QoS benchmarks of existing wireless operators have not been adversely affected by the availability or otherwise of spectrum to these operators. On the contrary, ‘spectrum drought’ is noted in select pockets of circle and they remain the top 20 cities. Needless to say, growth of wireless service in many of these areas has been quite high and the tele density levels of major towns are substantially higher than the national average of 19%. Therefore, to say that spectrum availability to existing operators needs to be augmented even beyond 10 MHz on this score does not stand to reason. Therefore, following

Recommendations on Review of license terms and conditions and capping of number of access providers

the principles laid down in the NTP, 1999 it would be in order not to place any cap on the number of players but it is certainly necessary to revisit issues like optimal usage of spectrum, assessment of spectrum requirements of market in the light of the new data on availability of spectrum in the near future. In fact, this aspect had been highlighted by the Authority in its ‘Recommendations on Spectrum Related Issues’ in May, 2005, the extracts of which are reproduced below:

The spectrum policy may be reviewed periodically depending upon the development in the market, level of competition, development of technologies and availability of equipments and spectrum.”

2.35 The Authority has thus reviewed various arguments and counter arguments, evidences cited by the stakeholders representing conflicting viewpoints in this matter. The Authority has extensively surveyed the empirical evidences on its own, through published material and has carefully examined the sector experience and the existing provisions of the license agreement governing access service provision. The Authority has also examined the whole issue from the standpoint of the current and upcoming technological developments. Principles of competition and other vital economic criteria have also guided the Authority in understanding this crucial issue of entry regulation in the access service market. Separately, the Authority has examined issues relating to the utilization of spectrum keeping in view the emerging scenario of spectrum availability, optimum use of spectrum, requirements of market and competition in the market. It is noteworthy these are the guiding principles that have been laid down in NTP, 1999.

2.36 Having considered all the above aspects and considering the implications of having to suggest a framework covering other issues that have been referred by the Government; the Authority is not in favour of suggesting a cap on the number of access service providers in any service area. It is not advisable to exogenously fix the number of access service providers in a market which is in a dynamic setting.

Recommendations on Review of license terms and conditions and capping of number of access providers

2.37 Accordingly, the Authority recommends that no cap be placed on

the number of access service providers in any service area.

Need for spectrum management review

2.38 Predictability and transparency in spectrum management are quite

important so as to ensure the degree of uncertainty is minimized in the

market place. Investors, current and potential base their investment

decisions depending upon the likely availability of spectrum which is a key raw material for the wireless industry. Continued uncertainty on

the quantum and timing of its availability can seriously erode the

confidence of the investors which may impede the growth of the sector

itself. Another major area of concern that has arisen out of this

consultation process is that which relates to the need for transparency

in the allocation of spectrum. The Authority recommends that it is

necessary, to ensure that allocations of spectrum are made in

accordance with the laid down policy and the information on such allocations and pending requests for allocation of spectrum, the

reasons for pendency, the duration of pending requests, etc. is

available in public domain. Above all, the likely availability of

spectrum in different bands in all the circles, the time period by

which it will be available for allocation, the criteria to be adopted

for setting up a ‘Q system’ needs to be made public.

2.39 The Authority is conscious of the fact that DoT has not asked for any

specific recommendation on the issue of spectrum allocation or pricing.

However, as noted earlier also, Spectrum is a scarce resource and is

the most vital raw material to offer mobile services. Main growth is

happening in wireless segment and future growth will also be wireless

centric. Having come to the conclusion that there should not be any

limit to the number of access providers, the Authority is of the opinion

that in order to have an actual free market, there is an urgent need to

have a predictable and transparent road map for any new entrant

Recommendations on Review of license terms and conditions and capping of number of access providers

wishing to enter the sector. There is a need to have a simple licensing regime and a transparent and efficient spectrum management system; otherwise the free market will only be a myth.

2.40 The present spectrum allocation criteria, pricing methodology and the management system suffer from a number of deficiencies and therefore the Authority recommends that this whole issue is not to be dealt in piecemeal but should be taken up as a long-term policy issue. There is an urgent need to address the issues linked with the spectrum efficiency and its management. In the subsequent paragraphs, following issues are being discussed:

Measures to increase the spectrum efficiency

Spectrum allocation criteria

Efficient pricing of spectrum

Need for improving the spectrum management

Measures to increase the spectrum efficiency

2.41 Spectrum is a scarce and limited resource; there is an increasing

pressure on its availability with more and more new wireless application coming in. In managing spectrum, regulators are concerned with two forms of efficiency: technical and economic. The objective of technical efficiency primarily relates to achieving the most intensive use possible of available spectrum within acceptable interference limits. It also seeks to promote the development and introduction of spectrum saving technologies. Therefore, world over, there is a concerted effort to adopt new technologies which are more spectrum efficient and are able to use the same amount of spectrum to deliver increase capacity. Some of these techniques are discussed below 13 :

13 Source : COAI,

http://www.nokia.com/NOKIA_COM_1/Operators/Mobile_Operators_&_Service_Providers/Mobile_E

ntry/Low_ARPU_Business_Enablers/amr_5.pdf, http://www.mobiledia.com/glossary/108.html, http://en.wikipedia.org,

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2.42 Spectrum Efficiency occurs when the maximum amount of information

(i.e., output) is transmitted within a given amount of spectrum (i.e., input),

or equivalently, when the least amount of spectrum is used to transmit a

given amount of information 14 . This could be expressed as:

Spectrum Efficiency= Output/Spectrum impacted

2.43 As per ITU-R Recommendations SM.1046-1 on “Definition of Spectrum

use and efficiency of a radio system’:

SUE=M/U=M/BxSxT where

SUE: Spectrum utilization efficiency

M: amount of information transferred over a distance

B: frequency bandwidth

S: geometric space (usually area) and

T: Time

For cellular mobile system, it can be expressed as

SUE=

(Traffic in Erlangs)

(Amount of spectrum in MHz)X(Area in Sq. Kms)

Synthesized frequency hopping (SFH)

For a

specified

Grade

of

Service

(GoS)

Synthesized Frequency Hopping (SFH) is a technique whereby spectrum

efficiency is further increased (from earlier technique of Baseband hopping)

by reusing the same spectrum across all cells in the network.

In Synthesized Frequency hopping, the call stays on one transceiver (TRX),

but the frequency of the TRX changes for every frame. The number of

hopping frequencies is only limited by the number of available frequencies,

thus providing greater spectral efficiency. As per the information available with

14 FCC spectrum policy task force, Report of the spectrum efficiency working group dated November

15,2002

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TRAI this technique has already been deployed by GSM operators in their networks.

Tighter Frequency Reuse Plan

Since each cell is designed to use radio frequencies only within its boundaries, the same frequencies can be reused in other cells not far away with little potential for interference. The reuse of frequencies is what enables a cellular system to handle a huge number of calls with a limited number of

channels. Fractional Load Planning (FLP) is a technique which uses Synthesized Frequency hopping. Fractionally loaded networks, planned with extremely tight reuse (1/1 or 1/3) have shown to be a very competitive method in order to achieve high spectrum efficiency. A lot of hopping frequencies per cell is possible if a tight TCH frequency reuse is applied, for example 1/1 or 1/3.

Adaptive Multi Rate Codec (AMR)

Adaptive Multi-Rate (AMR) is an audio data compression scheme optimized for speech coding. AMR was adopted as the standard speech codec by 3rd Generation Partnership Project (3GPP) in October 1998 and is now widely used in GSM. It uses link adaptation to select from one of eight different bit rates based on link conditions. The proven, highly efficient and very robust AMR (Adaptive Multi-Rate) narrowband codec is the 3GPP mandatory standard codec for narrowband speech and multimedia messaging services over 2.5G/3G wireless systems based on evolved GSM core networks (WCDMA, EDGE, GPRS). AMR operating at various bit rates is built into every GSM and WCDMA phone, ensuring that content generated by AMR can be played by virtually any wireless phone in the world. AMR operates on narrowband (200-3400 Hz) signals at variable bit rates in the range of 4.75 to 12.2 kbps. It provides toll quality speech starting at 7.4 kbps, with near-toll quality and better robustness at lower rates and better reproduction of non-speech sounds at higher rates. AMR is the only narrowband speech codec offering eight different bit rates that can be adapted according to network congestion.

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Adaptive Multi Rate Codec adds capacity to densely populated areas to bring better speech quality. It also improves indoor coverage and results in increased spectral efficiency and the ability to increase capacity of the existing base station sites with no extra hardware. AMR increases individual base station cell size by about 30% (figure 4), reducing the amount of investment needed in infrastructure because fewer base stations can be used to build coverage. Operators currently using Enhanced Full Rate (EFR) coding can almost double their network voice capacity with AMR.

can almost double their network voice capacity with AMR. Figure 4: AMR increases coverage AMR enables

Figure 4: AMR increases coverage

AMR enables the network to provide service to 140% more subscriber traffic from the same number of base station sites (figure 5) with voice quality even exceeding that of the EFR codec.

Recommendations on Review of license terms and conditions and capping of number of access providers

and conditions and capping of number of access providers Figure 5: Capacity increase by AMR AMR

Figure 5: Capacity increase by AMR

AMR is deployed extensively in India by operators to take advantage of this

enhanced voice quality algorithms and provide improve customer satisfaction. Benefits of AMR deployment depends upon:

Good carrier-to-interference ratio (C/I) of the network in the location of the mobile Penetration of AMR compatible mobiles in the network Support for AMR in all network elements of the network. As per the information available with TRAI, since last 2 years most of the handsets available in the market are AMR enabled.

Single Antenna Interference cancellation

Single Antenna Interference Cancellation or known as SAIC is a promising technology to boost the capacity of GSM network without any needed change in the network. It is in the high interest of network operator to use the allocated spectrum as efficiently as possible and to the highest possible capacity because most of the investment is done to get the licence for it. It would be desirable to have the frequency reuse of one, which means that each cell can operate in the same frequency. This in turn creates interference to the users operating in the nearby places. Increase Interference cause the

Recommendations on Review of license terms and conditions and capping of number of access providers

voice quality to drop and may cause call drop. It is now well know fact that it is possible to cancel the interference at the mobile handset side by changing the base band software without changing anything in the network side. SAIC enabled mobiles can work in high interference level. They also need comparatively less transmit power from network which in turn reduces the interference for non SAIC mobiles. Studies show that with 100% SAIC mobile penetration, a capacity gain of 60 to 80% is achievable.

Discontinuous transmission:

Discontinuous transmission (DTX) is a method of momentarily powering- down, or muting, a mobile or portable wireless telephone set when there is no voice i nput to the set. This optimizes the overall efficiency of a wireless voice commu nications system. It can be used in both uplink & downlink and GSM operat ors have deployed this technique. In addition to improving voice quality, it helps in reducing power consumption of the BTS & mobile.

In-building solutions (IBS) & Micro cells

solutions in many

c entral Business District (CBD) areas / Hotels / Hospitals / Conference centers etc.

Indian GSM operators have already deployed such IBS

2.44 Other techniques available to enhance the network capaci

ty and

improve the QoS include Antenna Hopping, Multiple layers

(underlay/overlay

Common BCCH functionality, Synchronized Network, Electrical down tilt antenna/reduced power/cell splitting, Software Features: Dynamic

concept) Power control, Deployment of EDGE,

SDCCH allocation, Directed Retry, Handover Power Boost, Interference Rejection Combining, etc.

2.45 During the consultation process, the service providers informed the Authority that most of them are using these techniques to increase the efficiency of spectrum utilization. As a result many ser vice providers are able to serve a much larger subscriber base than that specified in the subscriber base criteria with the same amount of spectrum. The

Recommendations on Review of license terms and conditions and capping of number of access providers

status of deployment of optimization techniques by GSM operators is shown in the table 1 below:

techniques by GSM operators is shown in the table 1 below: Table 1: Status of deployment

Table 1: Status of deployment of optimization techniques

2.46 The Authority is of the view that the existing spectrum allocation criteria should take into consideration all the spectrum efficient technologies that are available to enhance efficiencies of spectrum utilization

Allocation of spectrum 2.47 In this era of convergence, coupled with multi-user and multi-uses scenario it is imperative to have a transparent process of allocation of

Recommendations on Review of license terms and conditions and capping of number of access providers

frequency spectrum which is effective and efficient. There is an urgent need for spectrum management so as to :

allow regulatory certainty in the industry/predictability and transparency makes India a spectrum policy leader enables investment in new technology deployment ensures a cleaner transition to an era of converged and intelligent wireless devices allow a balance in the public and private uses of spectrum

N eed for revision of subscriber base criteria

2.48 The quantum of spectrum assigned to UASL or CMSPs depends on

what is colloquia lly referred to as the subscriber-base criteria.

How

limitati ons and problems, especially in the current market environment.

ev

er,

this

method

of

spectrum

allocation

has

a

number

of

2.49 The cu rrent subscriber-base allocation criteria, as defined by the DoT in Mar ch 2006, award a certain amount of spectrum to a licensee once their s ubscriber base figures cross a pre-defined level. The criteria depen d on three variables: the technology, the number of subscribers

in the

VLR, and the service area (see Table 2). For example, if the

subscr

iber base for a GSM operator in M

aharashtra (Category A circle)

cros

se

s 1.4 million, that operator will be eligible for 2 x 10 MHz of

spectru m. This method of spectrum assignment is inadequate for a numbe r of reasons, both inherent to the criteria, and from a network plannin g perspective.

Recommendations on Review of license terms and conditions and capping of number of access providers

As per WPC Lett

NT(CDMA) dated 29 March 2006.

er Nos. J-14025/200(17)/2004-NT(GSM) and J-14025/200(17)/20

04-

GSM subscriber base criteria (millions of subscribers)

Service Area

2 x 6.2 MHz

2 x 8 MHz

2 x 10 MHz

2 x 12.4 MHz

2 x 15 MHz

Delhi/Mumbai

0.3

0.6

1

1.6

2.1

Chennai/Kolkata

0.2

0.4

0.6

1

1.3

A

0.4

0.8

1.4

2

2.6

B

0.3

0.6

1

1.6

2.1

C

0.2

0.4

0.6

0.9

1.2

CDMA subscriber base criteria (millions of subscribers)

 
 

Service Area

3 rd carrier (2 x 3.75 MHz)

4 th carrier (2 x 5 MHz)

5 th carrier (2 x 6.25 MHz)

6 th carrier (2 x 7.5 MHz)

Delhi/Mumbai

0.3

1

1.6

2.1

Chennai/Kolkata

0.2

0.6

1

1.3

A

0.4

1.2

2

2.6

B

0.3

1

1.6

2.1

C

0.15

0.5

0.9

1.2

Table 2: Subscriber base criteria

2.50 Some of the gaps in the present framework for spectrum allocation are

mentioned below:

The criterion does not consider subscriber base density

across service areas. For example, both Mumbai and Delhi

circles have the same criteria. However, the population density

of Mumbai is about 37,600 persons/sq Km while that of Delhi is

about 10,000 persons/sq Km. It is a well-established fact that

higher population (and hence subscriber) densities will lead to a

higher demand for spectrum per cell site. However, the criteria

equate these and other groups, in spite of their different

population/subscriber densi ties.

The criterion does not account for subscriber distributions

within service areas. Consider a GSM licensee in circle X of

category A. One or two cities in X has about 2-4 million

population and the rest of the cities/towns has lower population

Recommendations on Review of license terms and conditions and capping of number of access providers

base. However, the present criteria do not take into account the population distribution and allots similar amount of spectrum as specified for a metro. This results in inefficient use of spectrum in majority of the service area. These criteria have led to attempts at over reporting of the subscriber base. Given that spectrum is a vital input to cellular operations, and one that can significantly impact costs, these criteria create incentives for over reporting. While some of this problem might be addressed with verification and VLR reporting (and not HLR), the possibilities and incentives are not eliminated.

2.51 The subscriber-base allocation criterion also causes problems from a network planning perspective. If a licensee has less spectrum to start with, their network capex increases because they need additional frequency reuse that requires more BTSs to provide service. As a result, the upfront costs for service provision increase if they get less spectrum to begin with. If subscriber growth is not strong, revenues do not come in, and service provision costs remain high, which leads to financial instability for new service providers. It is also difficult and costly to adjust networks repeatedly to use additional carriers. Every time additional spectrum is made available, licensees have to do network planning, incrementally purchase equipment, and re-tune and adjust network parameters.

2.52 Given these problems with the subscri

ber base criteria, it is necessary

that in a truly competitive, growing market, where technology neutrality

is the norm, spectrum assignments should not be based only on subscriber base growth.

2.53 The standard approach followed around the world is for regulators or governments to assign blocks of spectrum to operators at one time. In order to ensure use of spectrum, countries like the USA and South Korea have and enforce “use-it-or-lose-it” license conditions.

Recommendations on Review of license terms and conditions and capping of number of access providers

Maximized spectral efficiency is almost a necessary outcome, because operators will want to derive the maximum capacity from their spectrum assignments – with the precondition that spectrum be assigned at a price and not free.

2.54 The authority recognizes the fact that the principle of allocating spectrum in one block is an efficient method both from the point of its efficient usage and operator’s investment. However, in view of non availability of large amount of spectrum at the time of issue of initial mobile license an d also subsequently, this approach could not be implemented.

2.55 Today the spectrum allocation follows grant of UAS License. On payment of certain entry fee, the applicant is given the license and subject to availability, he is given a certain amount of spectrum in the 2G band. In case the applicant does not require this spectrum for providing the access service, he may want to use only wire-line or may

want to provide services using so me other spectrum, e.g. BWA, there is no clear cut path for him. He is required to pay the full license entry fee. The Authority in the past has also recommended that the license fee should be separate from the spectrum fee. With the advent of new

technologies where

resolution of this issue is becoming critical. As recommended earlier,

the Authority again reiterates that spectrum should be de-linked from the licensing regime. There is also a need to clearly specify the license fee charges without spectrum. The Authority is of the view that license fee charges should be on a reduced scale to facilitate penetration of

telecom services. Bifurcating present entry fee in

spectrum charge is difficult. It is also a fact that entry fee determined in

2 001 does not bear any relationship to present spurt in the telecom m arket. Keeping in mind that spectrum is a scarce resource, the A uthority recommends that the DoT should examine the issue e arly and specify appropriate license fee for UAS licensees who d o not wish to utilize the spectrum.

to license fee and

spectrum other than 2G band will be used,

Recommendations on Review of license terms and conditions and capping of number of access providers

2.56

P resently, initial spectrum either 2 X4.4 MHz in 1800 MHz band or 2 X2.5 MHz in 800 MHz band is allocated to a licensee based on his ch oice of technology and then additional spectrum is allocated by WPC b ased on a predetermined subscriber based criteria (Annex IV). The su bscriber based threshold for getting the next installment of spectrum is different for metros, A, B and C categories of service areas. The Authority has compared the subscriber threshold with the actual subscriber base of all the service providers in all the service areas (Annex V). The comparison of the two tables reveal that :

With the same amount of spectrum, some service providers are able to serve more than three times the subscribers the number specified in the spectrum allocation criteria.

Some of the service providers have excess spectrum as their actual subscribers are far below the subscriber numbers specified in the allocation criteria.

2.57

The Authority deliberated over the above results and has concluded

that :

The service providers have been able to serve the increasing subscriber numbers without additional spectrum by using state of the art spectrally efficient technologies and also putting more number of BTS for increasing the capacity. The present spectrum allocation criteria needs to be immediately reviewed as it is not spectrally efficient and has not taken into consideration the present technology innovations for increasing spectral efficiency. The service providers who are having more spectrum than their usage should be asked to surrender the additional spectrum in a specified timeframe.

Recommendations on Review of license terms and conditions and capping of number of access providers

Hoarding of scarce resource like spectrum should be viewed very seriously and in case of non-v acation, a heavy penalty should be imposed on the service providers.

2.58

As noted in ¶ 2.50, the present spectrum allocation criteria do not take into account the subscriber distributions within service area.

Therefore an examination of the allocation criteria will reveal that the difference in the subscriber threshold for a certain amount of

spectrum for a metro service area and a category A,

B or C service

area is marginal. For example, in metros like Delhi or Mumbai, for getting 10 MHz of GSM spectrum or 5 MHz of CDMA spectrum, a service provider is required to have a subscriber base of 1 million while for say B category service area, where the subscriber are distributed across the service area, having many times the area than a metro, the subscriber base required for the same amount of spectrum is also 1 Million.

2.59

The

Authority

has

analyzed

the

list

of

cities

with over

a

million

population (Annex VI). There are in all 35 such cities out of which excluding the 4 metros, there are only 5 cities with population above 3 million. Excluding the metros, Bangalore is the most populated city with a population of about 6 million. Even if it is assumed that these cities will reach 100% tele-density in next 1-2 years and assuming that the leading operator in these cities will have around 30% market share

than also it can be safely argued that based on the present subscriber base being served in metros with 10 MHz of spectrum, an operator in the category A, B or C service areas will not require more than 10 MHz for any of the cities. Therefore, the Authority is of the opinion that there is a need to tighten the subscriber criteria for all the service areas so as to make it more efficient from the usage and pricing point of view. Further, in the category A, B and C service areas the subscribers are widely distributed in the service area and therefore the amount of spectrum required in these areas for the

Recommendations on Review of license terms and conditions and capping of number of access providers

same number of subscriber as in a metro will be comparatively lower.

2 .60

The Authority is conscious of the fact that due to paucity of time it is not possible to frame and recommend revised allocation criteria for a longer term framework taking into account the latest spectrum efficient techniques and the foregoing discussion. Howe ver, in views of the findings given in ¶2.57 and theoretical simulations done on the basis of data gathered from the associations and vendors during the consultation process, to arrive at the subscriber numbers possible to serve with different spectrum amounts (Annex VII), the Authority sugge sts revision in the criteria.

2.61

T

he Authority recommends that in order to frame a new spectrum

a llocation criteria, a multi-disciplinary committee may be c onstituted consisting of representatives from DoT/TEC, TRAI, W PC wing, COAI & AUSPI. The committee may be headed by an e minent scientist/ technologist from a national level scientific

in stitute like Indian Institute of Science, Bangalore.

2.62

H owever, in view of reasons stated in ¶2.60 and so as not to delay b ringing a semblance to more effective utilization of spectrum, it

ntinued but

a lso recommends to enhance the present subscriber norms as an in terim measure so that the task of spectrum allocation is not s talled. The suggested revision is given below (Table 4) :-

is

felt that at present the existing criteria may be co

Recommendations on Review of license terms and conditions and capping of number of access providers

GSM subscriber base criteria (millions of subscribers)

 

Service Area

2 x 6.2 MHz

2 x 8 MHz

2 x 10 MHz

2 x 12.4 MHz

2 x 15 MHz

Delhi/Mumbai

0.5

1.5

2

3.0

5

Chennai/Kolkata

0.5

1.5

2

3.0

5

A

0.8

3

5

8

10

B

0.8

3

5

8

10

C

0.6

2

4

6

8

CDMA subscriber base criteria (millions of subscribers)

 

Service Area

3 rd carrier (2 x 3.75 MHz)

4 th carrier (2 x 5 MHz)

5 th carrier (2 x 6.25 MHz)

6 th carrier (2 x 7.5 MHz)

Delhi/Mumbai

0.5

2

3.0

5

Chennai/Kolkata

0.5

2

3.0

5

A

0.8

5

8

10

B

0.8

5

8

10

C

0.6

4

6

8

Table 4

Revised spectrum allocation criteria

 

The

operat ors should be given additional spectrum beyond 2X4.4MHz in

GSM

recom

obl igation.

iance of roll-out

the

Authority further recommends that the GSM operators and CDMA

and

2x2.5

MHz

in

CDMA

after

the

operators

achieve

mended subscriber base and also submit compl

Spec trum Pricing and Usage Charges

2.63 Spectrum is at the heart of all types of telecom services. The

importance of Spectrum as a scarce resource is globally recognized.

It is a finite resource and an essential input for the knowledge-driven

economy. It also plays an important role in increasing

competitiveness and growth of the telecom sector in the country.

‘Spectrum pricing’ therefore, needs to be set in a manner that

encourages the most optimum use of this resource, taking into

consideration both its availability and its growing demand. Pricing of

spectrum should therefore provide incentive for efficient utilization

and discourage creation of self-perpetuating shortages.

42

Recommendations on Review of license terms and conditions and capping of number of access providers

2.64 The underlying concept of spectrum pricing is

that fees should be

based on the amount of spectrum used and on the value of the

spectru

use of scarce resources. It is therefore, reasonable t o adopt the same for pricing of spectrum. However, a balance has to be struck, so that an efficient organization is not unduly disadvantaged. In this, both

pricing as well as allocation principles have an important role to play. An efficient use of spectrum would in turn have a direct impact on GDP and the resulting increase in competition thereby benefiting consumers through declining tariffs. Proper pricing and allocation principles would also en courage investment in more spectrally efficient technologies.

ent criterion for the

m to its users. A market price is a fair paym

2.65 At the core of all aspects that form the basis for reference of the Government to TRAI lie the issues relating to spectrum allocation and its pricing. Spectru m allocation criteria have already been covered elsewhere in this chapter. Turning to t he pricing aspects of spectrum, the following questions are relevant: -

a) Should the existing licensees who have acquired spectrum beyond the co ntracted limit of 6.2 MHz (upto 10 MHz.) pay any additional spectrum

able as of now ? If yes, how

much should that be and what is the basis of imposing additional charge / fee for spectrum on these licensees. If not, what is the basis for such a dispensation?

b) What should be the pricing policy of spectrum in the 800, 900 & 1800 MHz. bands with respect to licensees who may be allotted additional spectrum beyond 10 MHz.? What is the basis of such a policy being recommended?

c) What should be the pricing policy of spectrum in the 800, 900 & 1800 MHz. bands with respect to a new entrant who may be issued a license in future with an initial allotment of 4.4 MHz/2.5 MHz. in these bands? What is the basis o f such a policy recommendation?

d) Should the approach to price the spectrum in bands other than 800, 900 & 1800 MHz. be different from the one being recommended for

fee / c

harge over and above, what is pay

Recommendations on Review of license terms and conditions and capping of number of access providers

800, 900

is the basis of such an approach?

& 1800

MHz. bands and if

so, what is that approach and wh

at

2.66 Answers to questions raised above would serve the basis for

addressing the currently relevant issues and also to tackle certain mediu m to

In address ing these issues,

long term issues that are likely to arise in future.

the Authority has kept the following objectives in view:-

a. To promote the efficient use of scarce resource of radio spectrum

b. Reflecting market value of spectrum in the wake of scarcity,

to ensure its efficient utilization

c. Increasing rural and semi-urban roll-out

d. To facilitate access to radio spectrum particularly to innovative technologies and services, and

e. To afford opportunity for equal competition.

2.67 Radio spectrum is a finite natural resource. Its efficient utilization should

therefore acquire prime importance in the matte

pricing. In general, the role of pricing

making decisions to use the resource more efficiently. It, therefore, follows that the approach to pricing should reflect the scarcity beside s incentivising efficiency in use.

allocation and ide the users in

r

of its

s to gu

in a market i

2.68 E xisting licensing framework imposes the following levies/fees on a U ASL/CMTS licensee seeking to provide access services inter alia using w ireless technologies:-

a) Entry fee for acquirin g a license

b) License fee as a percentage of Adjusted Gross Revenue paid on a quarterly basis

c) Spectrum usage charges as a percentage of Adjusted Revenue paid on a quarterly basis

Gross

2.69 The Entry fee for acquiring a UASL license enables the licensee to become eligible for spectrum allocation in certain specified bands

Recommendations on Review of license terms and conditions and capping of number of access providers

without any additional fee for acquisition of spectrum which means that

allocation of spectrum follows the grant of license subject however to

availability of spectrum. There is only one direct cost to the operator

for spectrum i.e. spectrum charge in the form of royalty. Besides this,

the Government collects license fee as a percentage of Adjusted Gross

collection of

Revenue of the operators. The amount of annual

spectrum charge realized by the Government for the last three years

are given below:-

Year

Amount of spectrum charges collected (Rs. Millions)(approx)

2004-05

10280

2005-06

13760

2006-07

20900

Table 5

Amount of Spectrum Charge Collected from UASL/CMTS Licensees for the period 2004-05 to 2006-07

It is evident that the amount of spectrum charges collected from the operators

who are offering cellular mobile servic es in the country has been increasing

over a period of time and for the last financial year the amount collected is

estimated to be of the order of Rs.21000 million . Further, the licensees pay

license fee (including contribution to Un iversal Service Obligation) separately

as a percentage of their Adjusted Gro ss Revenues on a quarterly basis. The

amount of annual collection of license fee realized by the Government for the

last three years is given below (Table 6):-

Year

Amount of License Fee collected (Rs. Millions)(approx)

2004-05

62940

2005-06

56950

2006-07

63600

Tab le 6

Amount of License Fee Collected from BASIC/UASL/CMTS Licensees for the period 2004-05 to 2006-07

2.70 Economic growth in general and the growth in wireless services in

particular have led to buoyancy in the revenue to Government from the

Recommendations on Review of license terms and conditions and capping of number of access providers

access services using wireless technologies. Needless to say, the bands assigned so far for the purpose of providing access service are 800, 900 and 1800 MHz.

2.71 Spectrum pricing aims to ensure that the value of the spectrum is reflected in the fees that licensees pay for its access. There are generally three ways in which this is done:

Administrative Incentive Pricing which attempts to calculate the value of the spectrum by assessing the cost associated either with the user employing an alternative solution, or its opportunity cost foregone by denying access to an a lternative user.

Beauty Parades or Comparative Selection which fixes the price of the spectrum to ensure optimum utilization by awarding spectrum to the user(s) who score highest against a group of pre-set criteria (such as rural coverage or the fulfillment of roll-out obligation).

Spectrum Auction is fully market-based technique whereby spectrum is awarded to the highest bidder (or some combination of highes t priced bids).

2.72 In each case, the aim is to change spectrum users' behavior towards the use of the spectrum, to ensure that the maximum (social, economic or technical) benefit is accrued. However, in the present context, none of these above techniques of spectrum pricing are being considered for reasons s tated in the ensuing paragraphs.

2.73 The allocation of spectrum is after the payment of entry fee and gra nt of license. The entry fee as it exists today is, in fact, a result of the price discovered through a markets based mechanism applicable fo r the grant of license to the 4 th cellular operator. In today’s dynamism and unprecedented growth of telecom sector, the entry fee determined then is also not the realistic price for obtaining a license. Perhaps, i t needs to be reassessed through a market mechanism. On the othe r hand spectrum usage charge is in the form of a royalty which is linked

Recommendations on Review of license terms and conditions and capping of number of access providers

to the revenue earned by the operators and to that extent it captures

the economic value of the spectrum that is used. Some stakeholders

have viewed the charges/fee as a hybrid model of extracting economic

rent for the acquisition and also meet the criterion of efficiency in the

utilization of this scarce resource. The Authority in the context of 800 ,

900 and 1800 MHz is conscious of the legacy i.e. prevailing practice

and the overriding consideration of level playing field. Though the dua l

charge in present form does not reflect the present value of spectrum i t

needed to be continued for treating already specified bands for 2G

services i.e. 800, 900 and 1800 MHz. It is in this background that the

Authority is not recommending the standard options pricing o f

spectrum, however, it has elsewhere in the recommendation made a

strong case for adopting auction procedure in the allocation of all other

spectrum bands except 800, 900 and 1800 MHz.

2.74 Some of the existing service providers have already been allocated

spectrum beyond 6.2 MHz in GSM and 5 MHz in CDMA as specified

in the license agreements without charging any extra one time

spectrum charges. The maximum spectrum allocated to a service

provider is 10 MHz so far. However, the spectrum usage charge is

being increased with incre ased allocation of spectrum. The details

are available at Table 8.

2.75 The Authority has noted that the allocation beyond 6.2 MHz for GSM

and 5 MHz for CDMA at enhanced spectrum us age charge has

Different licensees are at different levels

of operations in terms of the quantum

additional acquisition fee for the quan tum beyond these thresholds

of spectrum. Imposition of

already b

een

im

plem nted

e

.

may not be legally feasible in view of the fact that higher levels of

usage charges have been agreed to and are being collected by the

Government. Further, the Authority is conscious of the fact that

further penetration of wireless services is to happen in semi-urban

and rural areas where affordability of services to the common man is

the key to further expansion.

Recommendations on Review of license terms and conditions and capping of number of access providers

2.76 However, the Authority is of the view that the approach needs to be different for allocating and pricing spectrum beyond 10 MHz in these bands i.e. 800, 900 and 1800 MHz. In this matter, the Authority is guided by the need to ensure sustainable competition in the market keeping in view the fact that there are new entrants whose subscriber acquisition costs will be far higher than the incumbent wireless operators. Further, the technological progress enables the operators to adopt a number of technological solutions towards improving the efficiency of the radio spectrum assigned to them. A cost- benefit analysis of allocating additional spectrum beyond 10 MHz to existing wireless operators and the cost of deploying additional CAPEX towards technical improvements in the networks would show that there is either a need to place a cap on the maximum allocable spectrum at 10 MHz or to impose framework of pricing through additional acquisition fee beyond 10 MHz. The Authority feels it appropriate to go in for additional acquisition fee of spectrum instead of placing a cap on the amount of spectrum that can be allocated to any wireless operator. In any case, the Authority is recommending a far stricter norm of subscriber base for allocation of additional spectrum beyond the initial allotment of spectrum. The additional acquisition fee beyond 10 MHz could be decided either administratively or through an auction method from amongst the eligible wireless service providers. In this matter, the Authority has taken note of submissions of a number of stakeholders who have cited evidences of the fulfillment of the quality of service benchmarks of the existing wireless operators at 10 MHz and even below in almost all the licensed service areas. Such an approach would also be consistent with the Recommendation of the Authority in keeping the door open for new entrant without putting a limit on the number of access service providers.

2.77 The Authority in its recommendation on “Allocation and pricing of spectrum for 3G and broadband wireless access services” had

Recommendations on Review of license terms and conditions and capping of number of access providers

recommended certain reserve price for 5 MHz of spectrum in different

service areas. The recommended price are as below:

Service Areas

Price (Rs.in million) for 2X5 MHz

Mumbai, Delhi and Category A

800

Chennai, Kolkatta and Category B

400

Category C

150

The Authority recommends that any licensee who seeks to get

additional spectrum bey ond 10 MHz in the existing 2G bands i.e. 800,900

and 1800 MHz after reaching the speci fied subscriber numbers shall

have to pay a onetime spectrum charge at the above mentioned rate on

prorata basis for allotment of each MHz or part thereof of spectrum

beyond 10 MHz. For one MHz allotmen t in Mumbai, Delhi and Category A

service areas, the service provider w ill have to pay Rs. 160 million as

one time spectrum acquisition charge.

2.78 As far as a new entrant is concerned, the question arises whether there

is any need for change in the prici ng methodology for allocation of

spectrum in the 800, 900 and 1800 MHz bands. Keeping in view the

objective of growth, affordability, penet ration of wireless services in semi-

urban and rural areas, the Authority is not in favour of changing the

spectrum fee regime for a new entran t. Opportunity for equal competition

has always been one of the prime principles of the Authority in suggesting

a regul a

o

a new entrant vis-à-vis incumbents in the wireless sector will go against

This is specific and restricted to 2G

bands

z. This approach assumes more

the pr inciple

tory framework in telec m services. Any diff rential tr

o

e

only

o

f level pla

yi

ng field.

i.e.

800, 90

0 an

d 180

0 MH

ea

tment t

sig nificance particularly in the context where subscriber acquisition cost

for a new entrant is likely to be much higher than for the incumbent

wireless operators.

2.79 In the case of spectrum in bands other than 800, 900 and 1800 MHz

i.e. bands tha t are yet to be allocated, the Authority examined various

Recommendations on Review of license terms and conditions and capping of number of access providers

nd h

would be appropriate in

systems. In response to the consultation paper, a number of stakeholders have also strongly recommended that the allocation of sp ectrum should be immediately de-linked from the license and the future all ocation should be based on auction. The Authority in its

re commendation on “Allocation and pricing of spectrum for 3G and broadband wireless access services” has also favored auction m ethodology for allocation of spectrum for 3G and BWA services. It is th erefore recommended that in future all spectrum excluding the

sp ectrum in 800, 900 and 1800 bands should be auctioned so as to en sure efficient utilization of this scarce resource. In the 2G bands (8 00 MHz/900 MHz/1800 MHz), the allocation through auction may not be

po

times of their license and the amount of spectrum with them varies from 2X4.4 MHz to 2X10 MHz for GSM technology and 2X2.5 MHz to 2X5 M Hz in CDMA technology. Therefore, to decide the cut off after which the sp ectrum is auctioned will be difficult and might raise the issue of level pla ying field.

m at different

possible approaches

as come to the conclusion that it

future for a market based price discovery

for p

ricing a

ssible as the service providers were allocated spectru

2.80

The spectrum charges are currently on revenue share basis starting fro m 2% of AGR for spectrum up to 2X 4.4 MHz and 2X 5 MHz for GSM an d CDMA respectively. The fourth Cellular license issued in 2001,

sti pulated that any additional bandwidth if allotted subject to availability an d justification shall attract additional License fee as revenue share (ty pically 1% additional revenue share if Bandwidth allocated is up to 6.2 M Hz + 6.2 MHz in place of 4.4 MHz + 4.4MHz). The above spectrum

ch

arge was subject to review by WPC wi

ng from time to time.

2.81

T

he WPC wing of DoT, has over a period of time through its various

orders

spectru m.

communi

cated

allocation

a

nd

rate

s

for

additional

blocks

of

The Table 7 below gives the current spectrum charge for the various blocks of spectrum.

Recommendations on Review of license terms and conditions and capping of number of access providers

 

GSM

Spectrum

2x4.4MHz

2x6 .2MHz

2x8MHz

2x 10MHz

2

x12.4

2x15

Blocks

M

Hz

MHz

charges a s a % of AGR

2%

3%

4%

4%

 

5%

6%

 

CDMA

 

Spectrum Blocks

Up to

 

2x6.25

2x 10

2x 12.5

2x15

2x5MHz

MHz

MHz

MHz

MHz

charges as a % of AGR

 

2%

 

3%

4%

 

5%

6%

Table 7: Spectrum charges

2.82 The Authority noted that in the last few years the market capitalization of listed telecom companies has increased manifold and their operating margins are also going up in line with the world’s competitive telecom markets/ operators. The Authority also noted that the share of the listed telecom companies in the total market capitalization (S&P CNX Nifty Index) was more than 13% for the period 01-Aug-2006 to 31-July-2007. The Authority further noted that the EBITDA Margin 15 of listed telecom companies is more than 1.75 time s in comparison to listed IT companies. In the wake of growing demand of spectrum and its limited availability, the Authority has revisited the existing spectrum charges to reflect a reasonable market value of allocated spectrum.

2.83 Keeping in view the scarcity of the spectrum, there is a need to deploy

spectral efficient technologies, if necessary through capital infusion, and to curtail the hoarding of spectrum. Tightening the norms for

spectrum allocation, linking it with

roll out obligations and a marginal

15 Based on information available on website of telecom and IT Companies. The Average EBITDA margin of IT companies was about 24% for the 1 st Quarter of FY2007-08, while Average EBITDA margin of two leading listed telecom companies was about 42% for the same period.

Recommendations on Review of license terms and conditions and capping of number of access providers

rate revision; it is felt, would make the service providers look for technical solutions and effective utilization of this very scarce resource. The Authority in its recommendations on “Allocation and Pricing of Spectrum for 3G and broadband wireless access services” had recommended an additional 1% of the operator’s total AGR. After examining various options for rationalizing the spectrum charges, the Authority, recommends adoption of Revenue share spectrum charges as given in table 8 below:

Spectrum

Current

Proposed

Upto 2X4.4 MHz

2%

No Change

Upto 2X6.2MHz/2x5 MHz

3%

No Change

Upto 2X8MHz

4%

No Change

Upto 2X10MHz

4%

5.00%

Upto 2X12.5MHz

5%

6.00%

Upto 2X15 MHz

6%

7.00%

Beyond 2X15 MHz

-

8.00%

Table 8: Revised Spectrum Charges

Spectrum Management

2.84 The radio spectrum is a key component of the telecommunications

infrastructure that underpins the information society. Spectrum management, however, has not kept pace with major changes in

practices and economic policies during the last

decade. Traditional spectrum management practice is predicated on the spectrum being a limited resource that must be apportioned among uses and users by government administration. For many years this model worked well, but more recently the spectrum has come under pressure from rapid demand growth for wireless services and changing patterns of use. This has led to growing technical and economic inefficiencies, as well as obstacles to technological innovation.

technology, business

2.85 Different frequency bands of radio spectrum are being used for a wide and diverse range of radio services by Government, private, industries for telecom, broadcasting, film and programme making, radar, radionavigation, air traffic control and satellites including low power devices.

Recommendations on Review of license terms and conditions and capping of number of access providers

2.86 Until recently the defence sector has had little difficulty meeting its spectrum needs; however, its ability is lessening as competing commercial demands for spectrum access grow rapidly. It is necessary for the defence to ensure that spectrum access does not limit its military options, whilst maximizing access to the civil community through innovative sharing mechanisms, especially in the Indian contributions.

2.87 With the proliferation

of new technologies and participation of private

sector in the telecom field it is a challenging task to provide them adequate spectrum and appropriate radio frequency spectrum for successful implementation of these systems. The emerging scenario as related to telecommunications is towards globalization, privatization and competition. T he demand for spectrum for public cellular mobile, non public mobile wireless broadband, VSAT, radio and television broadcasting services have increased tremendously. The radio regulatory mechanism has to cater for the new demands on the radio frequency spectrum owing to the future technological advancements so that these developments could get proper momentum. The mechanism has also to cater for the phenomenal growth of present and future usage and has to adequately take care of the existing technologies and usage.

2.88 Due to cumbersome procedures, lack of automation, non availability of data bases, lack of networking and unresponsive procedures, the present arrangement and practices of allocating spectrum being followed by WPC is unable to keep pace with the best international standards and practices being followed. These aspects need immediate attention.

2.89 The present system of administrative spectrum managemen

t allowed

the pursuit of non-market objectives such as national security, safety and equal access goals in addition to the goal of efficient spectrum

Recommendations on Review of license terms and conditions and capping of number of access providers

use. Its basic design was rooted in the simple radio technology of the 1920s, which required high signal-to-noise ratios. To avoid interference, licensees were given exclusive privileges and channels were spaced sufficiently far apart. Progress in information theory and the power of microprocessors has led to the emergence of a new vision of radio engineering in which multiple users can co-exist without the need for exclusive channel assignments. According to this new approach, sophisticated communications devices and protocols are sufficient to avoid interference. For example, agile radio devices are able to sense their radio environment and can choose communications parameters (frequency, polarization, coding, etc.) to control interference. Unlike analog radio, digital mobile communications allows more advanced forms of error correction. Communications therefore become less sensitive and tolerate a higher level of interference. Moreover, recent developments have questioned whether spectrum is scarce altogether, undermining another cornerstone of the exclusive licensing approach. Innovative network architectures, such as meshed networks, automatically configure themselves, using any active device to relay information.

2.90 With the tremendous growth in applications for licenses, the weaknesses of the administrative approach , including long delays, the impossibility for the government to pick the most promising proposals, and the lack of economic incentives to use spectrum efficiently, have became evident.

2.91 The spectrum manager needs to devise procedures to ration current and future demand for radio spectrum between competing commercial and public service users which requires mammoth planning task. The weaknesses and limits of the traditional approach to spectrum management make the frequency assignments process more time consuming and delay the rollout of the service. Consequently, measures to change the systemic deficiency in the functions of spectrum manager have to be sorted out in order to meet the growing need of spectrum.

Recommendations on Review of license terms and conditions and capping of number of access providers

2.92 Licensing process for issue of wireless operating licenses to various entities such as private telecom operator as well as G overnment Departments by WPC is still paper based. Though, recently, the method of licensing has been changed from manual to computerized system using new software Automated Spectrum Management System (ASMS) under which on-line sub mission of applications for frequency assignment, site clearances and issue of new licenses are possible, however, the full utilization of the software is yet to be made.

2.93 There is scope for change in the regulatory regime to make the licensing and frequency assign ment more transparent and time bound manner. In this context the web based submission of applications for frequency, SACFA site clearances and licensing are being made and their status can a lso be monitored. The database for frequency assignment and licenses has not yet been shared with stakeholders to make it more transparent.

2.94 The review / revision of National Frequency Allocation Plan, which is policy document is undertaken generally every two years in line with

the decisions of World Radio communication C onference and also keeping in view the current requirement of various stakeholders. This document was due to be reviewed in 2004 yet it has not been done

2.95 There is need to develop market based spectrum manageme

support spectrum management. Spectrum allocation criteria and spectrum pricing fees which include license fee and royalty need to be developed in consultation with all stakeholders in order to make it fair, more transparent, predictable and acceptable. Pricing of spectrum is to be made more effective in order to increase its efficiency. Spectrum refarming may be undertaken to refarm many spectrum bands for new services. The spectrum trading will make use of spectrum more efficient as it allows user to trade with new wireless users who require it most. Further there is a urgent need to strengthen the monitoring system to avoid hoarding and interference. 2.9 6 No long term and short term planning of spectrum for meeting the current and futuristic requirement of existing and new emerging wireless services exists in the spectrum management procedures, as

nt tools to

Recommendations on Review of license terms and conditions and capping of number of access providers

of now. The old assignments made to defence and other Government and public sector entities need to be reviewed and replaced with the existing spectrum efficient technologies. A short and long term plan for refarming of spectrum in different bands needs to be taken up and existing assignments should be shifted appropriately. Defence spectrum policy and strategies should be actively managed to take

spectrum management environment. Existing

and new service providers are allocated spectrum as and when it is

available. There is no certainty as to when the spectrum, which is vital

account of the changing

for rolling out mobile services would be available. Also the priority list of allocation of available spectrum is not clearly laid down.

2.9 7 To begin the process, the following set of principles could form the basis of the spectrum management framework so as to respond to the challenges of new market dynamics and technological advance s. These principles are as follows:

Responsive to change: As the uses of spectrum change in terms of the balance between different industries or between the public and private sector, it will be important that the new framework allow these changes to happen smoothl y. Technology neutrality: In order to equalize access to spectrum for different technologies, it is essential that the new framework is technology neutral. Service neutrality: This will be key if new services can use spectrum that might have been originally assigned for a different use. For example, if terrestrial broadcasting no longer needs all the spectrum assigned to it, new services like broadband wireless that require spectrum should be allowed to use that spectrum. Market-oriented distribution: In order that spectrum is distributed fairly among those who value it the highest, the use of market mechanisms should be employed for spectrum assignment. Correct pricing of spectrum: Presently, large parts of the spectrum have been set aside for use by the public sector (e.g. government departments, stated-owned enterprises, military). There is no economic reason why the public sector should not treat the radio

Recommendations on Review of license terms and conditions and capping of number of access providers

spectrum as any other factor of production, including paying for its use at market-related prices. Subjecting public spectrum use to market discipline can result in widespread efficiency gains within and beyond the public sector. This can start by putting together an inventory of public sector spectrum holdings, estimating their value, and levying spectrum charge from these organizations. Mixed methodologies: Licensing to services requiring interference protection, property rights for spectrum used commercially, and spectrum commons for free and unlicensed access should be mixed across bands to allow all types of users to access spectrum. Pre-defined and stable: In order to ensure service providers can determine th eir investment and deployment strategies, and reduce regulatory risk it will be important to clearly define a stable spectrum policy. This is especially important in case property rights are employed as an allocation regime. Balances public and private uses: Without doubt, public safety, research, and military uses will require spectrum. Any spectrum management regime should balance these public interest uses with private use of spectrum for commercial service provision. Promote efficient use of spectrum: By having an open and liberal spectrum policy framework, the allocation, assignment, and use of spectrum will move towards the most economically efficient situation. Promotes growth: For India to sustain high-growth in teledensity, and for the growth of the telecom and allied sectors such as content development, infrastructure provision, and equipment manufacture, it is essential that the spectrum policy allow a clear path for unfettered growth over the long-term.

2.98 Consequently, it is clear that the future spectrum management regime should be technology neutral to allow market forces to determine which technologies are deployed. In addition, service providers will have the freedom to deploy new technologies as they see fit and not be constrained by regulatory restrictions from investing in systems that

Recommendations on Review of license terms and conditions and capping of number of access providers

might improve the quality of service, coverage, or provide lower-cost service.

2.99 In its recommendation on allocation and pricing of spectrum for 3G and broadband wireless access services dated September 27, 2006 also the Authority had emphasized that considering the growth and development of wireless technologies and services, a long-term view on overall spectrum management policy including the organizational structure for spectrum management is necessary. A liberal and

tran

sp

aren

t approach is necessary so that it matches with the ov

erall

pol

icy

app

roach. There is a need to ensure availability of adequate

spectrum, to ensure efficient utilization of the spectrum, and making the

nsparent, and based on

a road map and well-researched plan. The organizations of spectrum management need to be strengthened. This whole issue is not to be dealt with in piecemeal but should be taken up as a long-term policy issue. From this perspective, perhaps it is timely to follow the

international practices where telecom regulator has been given specific

responsibility for the evolution of spectrum policy (

management under the guidance of an interdepartmental coordination

Annex VIII ) with

pro

ce

sses

of spectrum allocation completely tra

committee.

Recommendations on Review of license terms and conditions and capping of number of access providers